NSC — Q3 2026 Financial Report Analysis

Record revenue, but fuel and an unexplained jump in "materials and other" kept the margin under pressure

Norfolk Southern's third-quarter 2026 revenue rose 13.6% to a record $3,526 million, and diluted EPS rose 6.6% to $3.37 from $3.16. Volume (the number of carloads and containers moved) rose 3%, but the earnings release says higher fuel surcharges supplied eight points of the 14% revenue growth. Fuel surcharges are what a railroad bills customers on top of the base rate when diesel prices rise, and most of that money goes straight back out as fuel expense, so profit grew far more slowly than revenue: income from railway operations rose 4.7% to $1,150 million, and the operating ratio worsened to 67.4% from 64.6%.

How to read the operating ratio: it is operating expenses divided by revenue, the rail industry's main efficiency yardstick, and lower is better. A 67.4% ratio means 67.4 cents of every revenue dollar went to running the railroad, leaving 32.6 cents of operating profit. This report's "operating margin" figure is simply 100% minus the operating ratio (32.6% this quarter, 35.4% a year ago).

Key metrics

The release gives the 3% volume increase only as a total; units and revenue per unit for each business will come with the 10-Q, which has not been filed yet.

Revenue by business: intermodal led again

• Merchandise is carload freight other than containers and coal: chemicals, grain and forest products, metals and construction materials, and automobiles. It is about 62% of revenue and grew 11%.
• Intermodal (shipping containers and truck trailers that switch between ships, trucks and trains) grew fastest. Part of that is fuel: in Q2, $123M of intermodal's $165M revenue gain was fuel surcharge. CEO Mark George said demand rose in the quarter "as a tighter trucking market highlighted rail's competitive advantages."
• Coal revenue rose 12%, so all three businesses grew revenue by double digits, helped in each case by fuel surcharges.

Where the costs went

Total operating expenses rose $371M (+18.5%) to $2,376M, faster than revenue's 13.6%. Line by line:

• Fuel accounts for about half the cost increase ($183M of $371M). The CEO cited "disciplined cost control despite rising fuel costs."
• Labor costs were well controlled. Compensation rose only 2% on 3% more volume, a clear improvement on Q2, when pay-driven compensation grew 8% against 4% volume growth. This is the "productivity gains" the CEO points to.
• "Materials and other" rose $77M (+52%) with no explanation in the release. In Q2 this line grew mainly from locomotive maintenance and higher accident-related claims costs; the Q3 drivers (for example claims, maintenance, or fewer gains from property sales) will only be visible in the 10-Q.

Adding up the four core cost lines (compensation, purchased services, depreciation, materials and other) gives $1,886M versus $1,752M, up 7.6%. Revenue excluding fuel surcharges grew roughly 5-6%. So even setting fuel aside, core costs grew a little faster than core revenue this quarter, almost entirely because of the materials-and-other line.

What the headline numbers hide

• GAAP vs adjusted: the company's adjusted figures remove $70M of pre-tax costs this quarter: $42M of merger expenses (mainly employee retention agreements, advisor and legal fees) and $28M of East Palestine costs (net of $3M of insurance recoveries). A year ago it removed $40M (merger $15M, restructuring $12M, and $13M of net incident costs per the release's notes). Both years carry one-offs, so the adjusted comparison (+9.7% EPS) is the cleaner read of the business, and the reported comparison (+6.6%) is not distorted by a big prior-year windfall the way Q2's was.
• No help from buybacks or taxes. Diluted shares edged up to 225.2M from 224.7M; the company bought back no shares in the first nine months (the Union Pacific merger agreement bars buybacks without UP's consent) versus $533M a year earlier. The tax rate was 23.1% in both years. Interest expense dipped $4M to $193M and other income rose $7M to $30M, a small tailwind. So the EPS growth came from operations.
• Cash conversion is weaker this year, for a known reason. Nine-month operating cash flow was $2,720M against net income of $2,040M (1.33x), but down 17.5% from $3,298M a year earlier. The Q2 10-Q tied most of the drop to East Palestine payments, including the final $285M of the $600M Ohio class-action settlement paid in March. Lower deferred taxes ($162M vs $315M) also played a part. Capital spending was $1,407M (vs $1,475M), leaving about $1.3B of operating cash flow after capex, which covered $910M of dividends.
• Receivables grew faster than sales. Accounts receivable rose 24% to $1,229M from $988M at December 31. Higher fuel surcharges billed at the end of the quarter likely explain part of it, but it is the main reason working capital absorbed $243M of cash this year.
• Year to date, reported results are still lower. Nine-month revenue rose 8.5% to $9,989M, but net income fell 8.5% to $2,040M and EPS fell 8.3% to $9.06. The cause is last year's East Palestine insurance recoveries: the first nine months of 2025 recorded a $219M net benefit (including $394M of recoveries), versus $53M of net costs this year. Merger costs have reached $145M so far in 2026.
• Guidance: the release gives no numeric guidance, as in Q2, so there is no earlier target to measure against.

Did last time's read hold up?

Mostly yes. Our Q2 report expected the volume recovery to carry into Q3, and volume grew 3% (Q2: 4%). We said fuel would keep pushing the operating ratio up without changing profit dollars much, and the adjusted operating ratio again worsened by 2.1 points while adjusted operating income still grew 7%. The cost risk we flagged, pay growth outrunning volume, eased: compensation rose just 2%. The new weak spot is the "materials and other" line instead.

Takeaway: The underlying railroad improved: adjusted operating income rose 7.2% and labor costs grew more slowly than volume. But the record revenue says more about diesel prices than demand, and a 52% jump in "materials and other" costs, still unexplained until the 10-Q, is why the margin slipped even after removing fuel and merger costs.

Union Pacific merger

The release lists "the Merger" among its risks but gives no status update. As of the Q2 10-Q, Union Pacific had agreed (July 28, 2025) to acquire Norfolk Southern for stock and cash; closing requires approval by the Surface Transportation Board (the federal regulator for railroad mergers), either side could owe a $2.5 billion termination fee in specified circumstances, and buybacks are suspended under the agreement, which matches the zero repurchases this year. Merger costs ($42M this quarter) will keep reported and adjusted results apart until the deal closes or is abandoned.

Outlook

Management gave no numeric guidance. The CEO said demand for rail service rose during the quarter as truck capacity tightened, and that the company is "investing in a stronger, more resilient rail network that can support growth we see on the horizon."

Our read: the fuel effect will persist while diesel stays high: surcharges will keep inflating revenue growth and the operating ratio together, so profit dollars and adjusted EPS are the better scorecard than the ratio. The labor productivity shown this quarter is the most encouraging sign. For Q4, watch two things: whether the 10-Q explains the materials-and-other jump as a one-off (claims or maintenance timing) or a running cost, and whether intermodal growth holds once fuel prices stop rising. For shareholders, the STB's decision on the Union Pacific deal remains the larger variable than any single quarter.

Source: Norfolk Southern Form 8-K filed October 22, 2026, Exhibit 99.1 (earnings release) and Exhibit 99.2 (quarterly financial data). The full Q3 10-Q, with commodity-level volume and the management discussion, has not been filed yet. Adjusted figures are the company's non-GAAP measures, which exclude merger-related expenses, Eastern Ohio incident effects and (in 2025) restructuring charges. Background on the merger terms and Q2 East Palestine payments is from the Q2 2026 Form 10-Q.